JB Hi-Fi reported 1H24 sales down 2% and EBIT down 19%. While a weak result year-on-year, profitability is well up on four years ago and on a normalisation path. Sales declines have abated more recently, but weak sales are likely for at least 12 months in our view. Gross margins are likely to soften further and operating cost growth will remain elevated. As a result, there is limited earnings growth over the next three years.
Metcash’s acquisition of Superior Foods and two mid-sized hardware businesses is sensible and, in our view, best described as fairly priced. The upside in value for Metcash shareholders will come from realisation of synergies by FY26e, with potential value creation as Metcash builds scale in the foodservice and frame & truss sectors.
Metcash has announced the put option on the remaining 15% of Total Tools Holdings was exercised. The rapid increase in valuation of Total Tools highlights what a well-timed acquisition it was. The initial 70% stake was at an enterprise value of $81 million and this final 15% is at an EV of $677 million. While relatively small, the accounting for Total Tools will result in 2.7% EPS dilution on our estimates from this additional stake. Metcash’s Hardware division accounts for 49% of our enterprise value and the success with Total Tools is a key plank of that. We have a Buy rating and $4.50 target price.
Treasury Wines has announced the acquisition of DAOU Vineyards. This deal highlights a dramatic shift over the past four years by Treasury from a commercial to luxury wine player in the US market. The deal is returns dilutive initially and slightly EPS accretive. The cost synergies look very plausible and additional distribution reach highly likely, making the deal slightly value accretive over three years.
Woolworths has announced a majority stake in Petspiration Group for $586 million, at an EV/EBITDA of 11x. This is a full price, particularly given Woolworths will deliver the majority of the synergies. We are concerned that industry-wide revenue may recede given the COVID-19 pet boom added more than 2.5m dogs and cats to households. Woolworths is building out its “ecosystem” and Petspiration is a natural extension. However, the more important share price driver is Australian Food, which needs to demonstrate that previous capex is delivering a return on investment.
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